Forward exchange rate

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The forward import export exchange rate (also referred to as forward rate or forward price) is the rate at which a bank is willing to exchange one currency for another at some specified future date. The forward exchange rate is a type of forward price. It is the exchange rate negotiated today between a bank and a client upon entering into a forward contract agreeing to buy or sell some amount of foreign currency at a future date. The forward exchange rate is determined by the relationship among the spot exchange rate and differences in interest rates between two countries. Forward exchange rates have important theoretical implications in forecasting future spot exchange rates.

Multinational corporations often use the forward market to hedge future payables or receivables denominated in a foreign currency against foreign exchange risk by using a forward contract to lock in a forward exchange rate. Hedging with forward contracts is typically used for larger transactions, while futures contracts are used for smaller transactions.

This is due to the customization afforded to banks by forward contracts traded over-the-counter, versus the standardization of futures contracts which are traded on an exchange. Banks typically quote forward rates for major currencies in maturities of 1, 3, 6, 9, or 12 months, however in some cases quotations for greater maturities are available up to 5 or 10 years.



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